CRR & SLR

Introduction

• What Is Money?

• Functions of money

• Effects of the monetary policy

 Inflation

• Meaning and types of inflation

– Demand-Pull Inflation
– Cost-Pull Inflation
– Stagflation
• Causes of inflation in India
– Causes of inflation in India
– Deficit financing
– Erratic agricultural growth
– Agricultural price policy of the government
 Deflation

•Why Deflation occurs?

•Impacts exerted by Deflation

•Causes of deflation in India

– Decrease in the money supply
– Increase in the supply of goods
– Fall in the demand for goods
– Escalation in the demand for money
Measures to check inflation

• Monetary measures
• Fiscal measures
• Control over investments
 Cash Reserve Ratio

Effects on money supply

• CRR is used as a tool in monetary policy, influencing the country’s
economy, borrowing and interest rates

• CRR works like brakes on the economy’s money supply

• CRR requirements affect the potential of the banking system to

create higher or lower money supply
• For e.g. say…the CRR is pegged by RBI at 10%. if a bank receives
Rs. 100 as deposit, then they can lend Rs. 90 as a loan and will
have to keep the balance Rs. 10 in customer’s deposit account.

• Now, the borrower who has received Rs. 90 as a loan will deposit
the same in his bank.

• The borrower’s bank will now lend out Rs. 81 (Rs. 90 X 90%) and
keep Rs. 9 in his deposit account.

• As this process continues, the banking system can expand the

initial deposit of Rs.100 into a maximum of Rs. 1000 (Rs. 100 + Rs.
90 + Rs. 81….=Rs. 1000)
 And similarly if,

• For e.g. say…the CRR is pegged by RBI at 20%. if a bank receives Rs. 100 as
deposit, then they can lend Rs. 80 as a loan and will have to keep the
balance Rs. 20 in customer’s deposit account
• Now, the borrower who has received Rs. 80 as a loan will deposit the same
in his bank
• The borrower’s bank will now lend out Rs. 64 (Rs. 80 X 80%) and keep Rs.
16 in his deposit account
• As this process continues, the banking system can expand the initial deposit
of Rs.100 into a maximum of Rs. 500 (Rs. 100 + Rs. 80 + Rs. 64….=Rs. 500)
So,

• The higher the cash reserve (CRR) required, the lower the money available for

lending.

• This reduces credit expansion by controlling the amount of money that goes out by

way of loans.

• This directly affects money creation process and in turn affects the economic

activity

• Hence central banks in the world increase the requirement of cash reserves

whenever they feel the need to control money supply

 So we can conclude it as,
• CRR is increased to bring down inflation which happens due to
excessive spending power.
• Conversely, if the government wants to stimulate higher economic
activity and encourage higher spending to achieve economic
growth, they will lower CRR.
• Thus, banks indirectly enjoy the power to create more money.
• Maintenance of CRR

• Incremental CRR

• Maintenance Of Cash Balance

IMPACTS OF HIKE IN CRR
 How Does A CRR Hike Help In Lowering
Inflation?

• Higher prices of food articles, more liquidity in the

system and the lower base effect of last year.

• Hike in CRR rate ,Excess liquidity is sucked out of

the markets.

• Banks have lesser cash to deploy as loans.

 Impact on Interest rates
• As banks gets less money for giving loans, in
order to maintain profit margin they increase
lending rates.

• As loan rates go up, consumers tend to borrow

less and eventually spend less.

• Demand for goods and services come down

• Impact of crises on exchange rate

• Impact on liquidity

• Impact on credit off-take

• Impact on Banks and Individuals

 Effect of CRR Hike on Rate-sensitive Stocks

• Real estate

• Auto

• Debt markets

• Effect on Loans

• Effect on Companies

• Fixed Deposits
From a stock market
perspective

• So what should you do?

From a debt market
perspective

• So what should you do?

• Does RBI impose on penalty on banks
for defaulting on CRR deposits? 

• Does CRR apply to all scheduled

banks? 
Statutory Liquidity
Ratio
• Meaning

• Objective

• Maintenance of SLR
Does a change in SLR impact the
interest rates?
Comparison with Asian countries

• The SLR As A Monetary Policy Instrument In

Bangladesh

• Philippine Central Bank Cut Reserve Requirement

Case Study
• The case provides insights into the inflationary
situation witnessed in 2006-07 in India.
• It examines the reasons behind the phenomenon
of inflation and describes the various measures
taken by the Indian government and the nation's
central bank to control it.
• It also discusses some of the criticisms against the
steps taken by the Indian government.

• Understand the concept of inflation and its causes.

• Critically analyze the various initiatives taken by the

Indian government and the RBI to address inflation.
• Understand the concept of inflation and its causes.

• Critically analyze the various initiatives taken by the Indian

government and the RBI to address inflation.

• Analyze the significance of Government and Central

Bank in controlling inflation and the possible effect of
their initiatives on the economy.
Thank you